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Question:

The following data are reported for Moving Vans, Inc.:
Dividend yield 5%
Dividend payout 20%
Return on equity 15%
Assuming Moving Vans' dividend yield, dividend payout, and return on equity will remain constant indefinitely, the cost of equity capital is closest to:

A 17%.
Explaination

Using the constant growth dividend model, the price for a common stock is: $1202_w99_h42.png$
Solving for k : $2769_w102_h40.png$
where:
P = current stock price
D = year end expected dividend
k = cost of common equity capital
g = sustainable (constant) growth of equity, earnings, and dividends
The sustainable growth for a company's dividends equal the ROE times the earnings retention rate. The earnings retention rate equals 1 minus the dividend payout rate. Therefore:
g = 0.15 × (1 − 0.20) = 0.12
$9674_w323_h40.png$